The current economic downturn has encouraged many businesses to cut their prices or fees, in order to be more competitive. These price cuts create a number of important, often overlooked issues.
Here are a few common price cut issues you need to avoid, along with some suggestions and answers.
Even small price reductions have big consequences
When a company cuts its prices, it needs to make a significant increase in sales – just to maintain the same profit level it had before the cuts.
For example: A business I studied, which was making around 45% net profit, decided to lower its prices by just 10%, as a way to halt it’s drop in sales. It then found that it needed to increase sales by 20%, simply to stay as profitable as it was before the 10% price cut! When you consider that many smaller businesses are cutting their prices by two or three times that much, it gives them a huge mountain to climb!
So, if a company is planning a price cut, it needs a powerful marketing strategy in place; to generate the additional sales required, to cover the drop in profitability.
The great price drop paradox
Consumers have been taught that when prices drop, so does quality. Because of this, when a company cuts its prices, its customers actually pay far closer attention to the quality of the products and services they receive. The paradox here, is that by lowering its prices, a company often attracts far more scrutiny from consumers and more complaints; than when they offered the same services at a higher price!
So, if a company is planning a price cut, it needs to pay more attention than ever to customer service and quality control.
Sudden price drops in a recession are often seen as a panic measure
Your customers and prospective customers are all very aware that the economy is struggling right now. They are also aware that many companies have gone broke recently – many of whom will have cut prices before hand, in an effort to increase sales and turnover. A company must, therefore, ensure its price cuts are not seen as a panic measure.
So, if a company is planning a price cut, it needs to market the cuts correctly; so as to reassure existing clients and the marketplace.
It’s easy to cut prices but hard to increase them again
Once a business cuts its prices, customers get used to the new, low prices very quickly. In fact, these low prices stop ‘feeling’ as if they are low and very soon start feeling like the typical, regular price. This can cause a major problem; when the provider needs to increase prices to their normal level again. Although they are simply charging customers what they used to, their customers will feel the ‘pain’ of a price spike.
So, if a company is planning a price cut, it needs to have a powerful strategy in place, which includes plans for increasing prices again.
My advice
If you want your products or services to be twice as valuable to your customers and prospective customers – Don’t cut your prices in half!
Instead, find a way to double (or more than double) the value of whatever you provide!